A day of volatile trading saw gold touch a new high of $1,630, the FTSE 100 slide more than 1pc, the Dow Jones drop 1.6p - the biggest fall in eight weeks - and US government bonds sold off as the world's eyes again focused on a deeply divided Washington.

President Barack Obama, as well as the Republican House of Representatives and the Democratic Senate, are running out of time to agree to lift the country's $14.3 trillion debt ceiling. The US Treasury has said that it won't be able to pay all its bills by next Tuesday, raising the spectre of the country's first major default in its history.

While there was no sign of panic selling in any market, the breezy confidence that investors once had over a deal being struck is fading with each passing day. Leaders in Washington have been engaged in fruitless talks for weeks, and yesterday offered markets little hope the impasse will be resolved before the weekend.

"The uncertainty that is out there is obviously troubling for people - the thing with the debt ceiling and just our own fiscal structure in the country is you have this overhang, this cloud," said Jason Clark, a fund manager at AFAM.

The White House and top Congressional leaders have been working on an ambitious plan to cut the country's deficit by up to $4 trillion as a condition of raising the debt ceiling. Since the collapse of talks between President Obama and John Boehner, the Speaker of the House of Representatives and the US's top Republican, late last week, politicians from both sides have instead worked on competing plans to raise the country's borrowing limit. Public comments from each side suggested the divisions between them are hardening as the deadline approaches.

Harry Reid, Democratic leader of the Senate, said of his party's plan: "There's only one Bill in Congress that is a true compromise." The Democrats are pushing a plan that would see the deficit cut by $2.7 trillion and the ceiling extended beyond next year's presidential election. Mr Boehner's plan, which would see the ceiling extended until the end of the year and that President Obama has said he won't sign into law, ran into trouble with members of his own party yesterday who argued its spending cuts do not run deep enough.

Signs of disagreement among Republicans was enough to send the cost of insuring short-dated Treasury bonds to an all-time high. Gold, too, was in heavy demand as investors retreated to a metal that has enjoyed huge gains since the financial crisis marked the start of the current economic turbulence. "With each passing hour of this brinkmanship on the US debt situation, gold becomes more attractive," said Bill O'Neill, a partner at commodity investment firm LOGIC Advisors.

While markets grew more nervous, the latest data from the Federal Reserve suggested that the impasse on Capitol Hill is doing little for the economy. The central bank's Beige Book survey of US regional economies showed that eight out of 12 have seen the pace of expansion slow in recent weeks. "Economic activity continued to grow," the report said. "However, the pace has moderated in many districts."

Tomorrow is expected to see confirmation the world's largest economy slowed further in the second quarter of the year after stumbling in the first. Wall Street economists expect US growth to have slowed to a 1.6pc pace from 1.9pc in the first quarter. "The picture of US growth in the first half of the year will not be a pretty one," said Gregory Daco, an economist at IHD Global Insight.

Traders say evidence the recovery is again faltering is helping to sustain demand for US government bonds even as the country's political elite are pushing the risk of default to the wire.